Sunday, September 4, 2011

SIA's new long-haul LCC to start with 400-seat B777s, plans 16-aircraft fleet within four years

Singapore Airlines’ new long-haul low-cost carrier will initially operate a fleet of four B777-200s in a dense configuration accommodating about 400 passengers and incorporating a tight 10 seat-abreast economy class cabin. The new airline has begun the process of applying for an air operators’ certificate (AOC) and is preparing to launch services around mid-2012 on medium and long-haul routes from its Singapore base. It plans to pursue a relatively high growth in its first four years, with its fleet slated to reach 16 aircraft in mid-2016.Higher growth than AirAsia X, but still catching-up

The Singapore Airline (SIA) Group has so far provided few details on the new and unnamed carrier, announcing only that B777-200 aircraft currently in SIA's fleet have been selected as the aircraft type and choosing not to publicly reveal an initial fleet size or configuration. But tender documents issued by SIA’s New Aviation subsidiary for wireless in-flight entertainment (IFE), in-flight Internet and connectivity, and seat power systems state the new carrier plans to have a fleet of four B777-200s within its first few months.

The growth to 16 aircraft within four years plots it in on a higher growth trajectory than low-cost long-haul operator AirAsia X, who commenced services in Nov-2007 with a single A330 and now, two months shy of its fourth anniversary, operates a fleet of 11 A330s and A340s that are of similar capacity to the B777-200. By 2016, however, AirAsia X will have a larger fleet: the carrier has 3 A330-200s and 17 A330-300s due for delivery by 2017, when the first of 10 A350-900 aircraft are to start arriving, according to Ascend data. Low-cost, long-haul operator Jetstar and its Jetstar Asia subsidiary are expected to have a smaller fleet than AirAsia X.

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Wireless IFE brings cost savings

SIA becomes the latest carrier to show serious interest in wireless IFE following a recent trial from American Airlines and Aug-2011 commitment from United Airlines to equip its B747 fleet with it. Wireless IFE, in which passengers view entertainment broadcast through wifi networks to their personal electronic devices (PEDs), enables carriers to provide a low-cost solution as they do not have to invest in the costly, weight-heavy, and maintenance-intensive infrastructure of providing a screen, power, and cabling to every seat, the traditional system known as embedded IFE. AirAsia X briefly offered embedded IFE before deciding to remove it due to weight and low uptake from its price point that reflected the cost of the system. AirAsia X estimated it saved one tonne of weight per aircraft by removing embedded IFE. The carrier in Jun-2011 announced it is pursuing its own wireless IFE solution via a partnership with sister company Tune Box.

The tenders state that SIA plans to outfit the B777-200s to accommodate "around 400 passengers" - 70 passengers shy of the capacity on its A380 - and asked seatpower vendors to accommodate quadruple seating (four seats together) as well as triple seating and some double seating. This indicates SIA will retrofit its aircraft from their present 3-3-3 to a tight 3-4-3 configuration, squeezing in an extra seat per row, which could add 40 seats per aircraft. The tenth seat per row is typically accommodated by decreasing seat width by 1.25in from 18.45in to 17.2in and also reducing aisle width. Double seats are expected to placed at at emergency exits, bulkhead rows, and the rear of the aircraft where its fuselage tapers.

SIA's B777 fleet presently has the more standard 3-3-3 economy configuration, including on the B777-200s that are earmarked for the new low-cost carrier. SIA operates its 26 B777-200s in two different configurations: one with a total of 288 seats in three-class configuration and another in a two-class configuration seating 323.

Almost all B777 operators configure their economy class sections with nine-abreast seating, although 10-abreast seating is gaining traction and is most prominently used by Emirates, which has over 80 B777s in the ten-abreast configuration. Its largest B777-200 configuration seats 346 in two classes, including a large business class cabin and a 34in pitch in economy. All Nippon Airways and Japan Airlines operate B777-200s domestically in Japan with 10-abreast economy seats typically with 31in of pitch. In particular, JAL operates a 380-seat configuration in which approximately 40% of available floorspace is occupied by premium seats - making SIA's planned 400-seat configuration very possible.

However, SIA’s economy class seat pitch is typically 32in. It is unclear if New Aviation will keep a similar pitch as it retrofits the B777-200s it is inheriting with newer generation lighter seats. A similar or only very slightly reduced seat pitch is likely given the long duration of some of the carrier’s flights. Long-haul low-cost carrier AirAsia X also has a 32in seat pitch across its economy class cabins while Jetstar’s long-haul fleet has a 31in economy class seat pitch, including in the A330s it now bases in Singapore.

As New Aviation (the new SIA subsidiary will announce its brand later, although the name "Scoot" is under consideration and has been registered in Singapore) will be the first long-haul low-cost carrier to operate B777s, there is no direct comparison. The two existing long-haul low-cost operators in Asia - Jetstar and AirAsia X - both use A330s/A340s in two-class configurations, with Jetstar accommodating eight abreast in economy while AirAsia X has a tighter configuration of nine-abreast in economy.

Business class or extra legroom economy seats could be offered

SIA has not yet indicated if the new carrier will follow Jetstar and AirAsia X in offering a business class-style premium. Both AirAsia X and Jetstar have found their premium cabins profitable with higher yields than in economy and have improved service for those seats. In particular, AirAsia X started retrofitting its A330 fleet with 12 premium seats but by the time it reached its A340 fleet, which has the same cabin length and width, it added an extra row to give a total of 18 premium seats. If SIA's LCC was to have a premium cabin that matched that of AirAsia X and Jetstar, whose premium cabins are akin to a skimmed-down business class, the SIA group would need to consider if the premium LCC product would cannibalize its mainline premium product or if the two could be complementary, as they are in the Qantas Group between Jetstar and Qantas mainline.

Even if SIA's LCC opts for a single-class configuration, the new carrier could still offer extra legroom seats at the front of the cabin or sell exit row and bulkhead seats for a premium, as is common in the LCC sector. The new airline could also add some frills such as complimentary food and drink and checked luggage with the business or extra legroom economy seats. AirAsia X and Jetstar provide checked luggage and complimentary meals and drinks in their premium cabins. Overall the carrier is planning to pursue a strict no-frills model, following Jetstar and AirAsia X.

Strict new no-frill model eyes Australasia, North Asia, Europe, West Asia and Gulf

New Aviation plans to use its IFE system to sell products which are complimentary on SIA, including food, beverages and movies. This will help generate a robust stream of ancillary revenues. The high density configuration will also be a key cost differentiator with SIA mainline and other legacy carriers.

In the IFE tender document, New Aviation confirms the new carrier will “operate on a no-frills model whereby a very low airfare will be offered for basic transportation services. Passengers may then customise their air travel by purchasing only those additional services they require; such ancillary services may include in-flight entertainment, in-flight connectivity and/or in-seat power supply.”

While New Aviation is closing in on finalizing seat and IFE details, it has not yet selected initial destinations as its analysis of possible routes continues. Only Southeast Asia has been excluded as the carrier will not operate any flights of less than four hours.

“Potential destinations include Australasia (Australia and New Zealand), North Asia (including Greater China, Korea and Japan), UK/Europe, West Asia (including India), and the Gulf States,” New Aviation states in the IFE tender document. “New Aviation will target the long haul, low cost market segment serving routes of four hours or above ex-Singapore with Boeing 777-200 and 777-200ER aircraft. Aircraft will accommodate around 400 passengers.”
New airline targets Apr-2011 entry into service for first aircraft

SIA has previously said the new carrier’s initial fleet will be sourced from B777-200s exiting SIA’s mainline operation. According to the aircraft entry into service schedule published as part of New Aviation’s IFE tender, the first aircraft is slated to enter service on approximately 1-Apr-2012. New Aviation expects to subsequently place into service one additional B777-200 at the beginning of May, June and July, resulting in a four-aircraft fleet by early July-2011.

New Aviation then plans to take a one year hiatus in expansion, operating only four aircraft until it embarks on a second phase of its development in mid 2013. In mid-2013 two additional aircraft B777-200s are slated to enter service. The carrier plans to place into service its first two B777-200ERs in mid-2014, followed by three more B777-200s in mid-2015 and another three aircraft (two B777-200ERs and one B777-200) in mid 2016.

All of SIA's B777-200s are -ER models, but some of the -ER models have engine thrust derates, which reduce maximum take off weights (MTOW) and thus purchasing costs and landing fees as those are typically calculated on MTOW. Nonetheless, SIA refers to a derated B777-200ER as a "B777-200". The derated B777-200ERs ("B777-200s") can be brought up to full -ER standard. This would be necessary for long-haul routes, including to New Zealand and Western Europe.

SIA has said other aircraft types, from within SIA Group’s existing fleet and outside, will be considered at a later phase. But it appears from the IFE tender documents that SIA intends to stick at least for the first five years with only B777-200/200ERs.

According to SIA, the mainline subsidiary now has a fleet of 26 B777-200s and nine B777-200ERs. Of the 26 B777-200s, SIA last year retrofitted 11 aircraft – an upgrade prompted in part by delays in B787 deliveries. New Aviation will likely take 10 of the 15 non-retrofitted B777-200s.

SIA for several years has been aiming to eventually phase out its B777-200 fleet, which is used on short and medium-haul flights within Asia and the Middle East. Several of SIA’s 26 remaining B777-200s will likely be replaced by the 15 additional A330-300s that SIA agreed to lease from Airbus earlier this year and will be delivered between 2013 and 2015.

SIA already leases 19 A330s, which were delivered in 2008 and 2009 and which replaced B777s on medium-haul flights within Asia-Pacific and the Middle East. These aircraft feature a much improved business class product over the B777-200s which have not been retrofitted. The 19 A330s and 11 retrofitted B777-200s feature angled lie-flat business class seats while the 15 non-retrofitted B777-200s have old style recliner seats in business class and in some cases lack the on-demand IFE system that is common on the rest of SIA’s fleet.

At least half of SIA’s A330s are expected to eventually be replaced by A350s. SIA now has 20 A350s and 20 B787s on order. Revised delivery dates for these aircraft have not yet been provided but SIA’s first B787 delivery is expected after it receives its first A350. The A350 and B787 will primarily be used on long-haul routes, although some of SIA's B787s or A350s could also eventually be used by the long-haul low cost carrier, which would substantially reduce operating and maintenance cost and make it more competitive against the B787s Jetstar plans to operate from its Singapore hub and the A350s AirAsia X will operate from nearby Kuala Lumpur.

SIA’s remaining B747-400s are due to be phased out by the end of this year as additional A380s are delivered. The carrier’s nine remaining B777-200ER, which are used on some long-haul routes such as Amsterdam, Copenhagen and Johannesburg/Cape Town, will also be replaced over the medium-term – likely with B787s.
SIA's large B777 fleet provides for accelerated expansion

SIA also has the option of upgrading any of its 26 B777-200s (derated B777-200ERs) to full B777-200ER standard. Depending on how many long-haul routes the new carrier ends up operating, such upgrades may be pursued as aircraft are moved from SIA to the new subsidiary.

New Aviation for now is slated to get four of SIA’s nine remaining B777-200ERs and 10 of its remaining 25 B777-200s. The other 21 B777-200/200ERs will be returned to lessors, sold onwards or handed over to New Aviation if the new carrier decides to accelerate expansion. According to Ascend data, SIA owns 30 of the 35 B777-200ERs it now operates. That would suggest at least another 16 B777-200/200ERs could potentially be handed over to the new long-haul low-cost carrier for a total of 30 aircraft.

SIA also owns six B777-200ERs that are currently leased to Royal Brunei Airlines (RBA). These aircraft are now due to be returned from late 2012 and could also potentially end up at the new long-haul low cost carrier. RBA has expressed interest in returning some of these aircraft early as part of its network restructuring.

SIA currently does not have any B777-200s parked. The initial four B777-200s slated for New Aviation are expected to exit the SIA mainline fleet early next year and almost immediately go into the hangar for heavy maintenance and retrofit. New Aviation has already booked MRO slots in Singapore for the aircraft to be overhauled and retrofitted. Typically the first aircraft in a new retrofit programme takes about six weeks to be completed, while subsequent aircraft can be completed in a quicker timeframe.
Launch date contingent on how quickly seats and IFE systems can be delivered

In first announcing in May-2011 plans for the new long-haul low fare carrier, SIA said it expected the new airline would commence operations within one year. From an aircraft availability and AOC standpoint, New Aviation seems on pace to meet this target. But this schedule is contingent on the seat and IFE vendors meeting an aggressive timeline.

Typically seat vendors need at least 12 months of lead time. As indicated in its tender with the estimated aircraft in-service dates, New Aviation was initially hoping the seats and IFE systems would be supplied by Apr-2011. This would allow the aircraft to be reconfigured as soon as it comes out of SIA’s fleet and enable proving flights to begin in Apr-2011, paving the way for a potential launch in May-2011. However, in the likely event the first batch seats and IFE systems are not ready in time, the launch may not take place until later in 2Q2011 or early 3Q2011.

The selection of a vendor for the seats and IFE system is a key milestone in moving forward with the launch and honing in on a launch date. Proposals to the IFE tender, which asks for solution offering wireless IFE, wireless connectivity and on demand in seat power supply solutions, were due late last month. The relatively fast lead-time for supplying the kit likely limited the number of responses.

The contract, which will include firm purchases covering only the first four aircraft, should be awarded shortly. The 10 additional aircraft New Aviation plans to place into service from 2013 to 2016 will be covered through options. This gives the new carrier flexibility should it chose against adding aircraft in 2013 or opt for a different solution.

Changes in seats and IFE systems would not be unheard of in the fledgling long-haul low-cost sector as the model is evolving so fast, and wireless IFE would be significantly easier to replace than an embedded system while a better seat, such as with a lower weight that would reduce fuel consumption, could be justified as retrofitting if it enhances operating costs.
SIA's LCC sets high bar for wireless IFE

While wireless IFE is still an emerging technology, SIA has set high requirements, as might be expected from a premium and high-service carrier. A key requirement for New Aviation’s IFE system will be for an interactive buy-on-board solution. Some new generation IFE systems, such as the Panasonic-powered Red system at Virgin America, allow passengers to select food, beverage, movies and even in-flight duty free through touch-screen technology. SIA’s new long-haul low-cost carrier wants to take this one step forward and allow passengers to make such selections using their own PEDs via the vendor-provided wireless IFE product. New Aviation is considering renting a "small stock" of PEDs to passengers who do not bring with them smartphones, tablets or laptops.

Wireless IFE reduces aircraft weight, which can translate to fuel savings or capability to carry additional cargo, which would be a lucrative offering for SIA's LCC. AirAsia X and Jetstar Asia market belly space on their aircraft through their limited networks, whereas SIA has a significantly larger cargo network it could call on when space permits.

Some industry observers have questioned if wireless IFE means airlines will have to give up control, particularly to interrupt the system for duty free sales and emergency announcements, New Aviation wants full control. It says the solution it seeks “shall have the ability to ‘push’ information, such as in-flight sales, F&B offers, information, etc., onto passengers’ PED. The supplier shall include in the proposal what the passenger will experience for this feature”. Bidders for the tender could, for example, propose pop-up notifications for duty sales. SIA has specified the system must be able to be cut off, via switches in the cockpit and cabin, in the event of an emergency. SIA's LCC has not ruled out a two-aircraft trial for up to three months prior to committing to long-term contract. The system is requested to run on 802.11b/g/n wireless networks, which the majority of PEDs accommodate, and accommodate PEDs of various operating systems, including Mac OS, Windows, iOS, Android and Blackberry.

Very few suppliers offer wireless IFE. American Airlines has a wireless IFE trial with Aircell, who also supplies it with connectivity over a ground network unavailable in Asia, likely ruling Aircell out as SIA's LCC tender favors companies who can provide multiple solutions in the IFE, connectivity, and seatpower scope. Lufthansa Systems is gaining for its wireless IFE offering and is expected to announce later this month a new customer in Virgin America, who could potentially bring Virgin Australia in as well. AirAsia X is working with Flight Focus and sister company Tune Box for its wireless IFE solution and has said it will offer its product to other airlines, but only once AirAsia X has a newer version.

Overlooked in supplying wireless IFE or in-flight connectivity is seatpower to recharge devices, whose batteries are especially drained when using wifi ports to access the wireless IFE or connectivity, which airlines are reluctant to address due to costs. SIA's LCC however, is pursuing seatpower, which SIA mainline B777-200s lack in economy. SIA may consider a bidder who can charge passengers for the use of seat power, thus creating another ancillary revenue stream; AirAsia X has been studying this feasibility for over a year. Not every seat, however, will have a dedicated powerport, as is found on some aircraft today. The tender specifies there should be one outlet for every double seat and then two outlets for triple and quadrule seats. Also specified is an outlet in the cockpit sidewall, indicating SIA's LCC may pursue an electronic flight-bag solution. SIA is rightfully keeping watch on weight, requesting suppliers to state the weight of each seatpower as well as for the total system.
Internet and mobile phone support also requested

SIA's LCC has requested in-flight connectivity to provide Internet usage as well as voice and data services over mobile networks. SIA's LCC wants all mobile networks accommodated, including the common 3G network used by smart phones and the CDMA network used primarily in North America and Japan. SIA's LCC explicitly states the connectivity solution "should also be able to support all mobile phone types, e.g. Mobile Phones, Third Generation Mobile Phones, PDA phones, BlackBerry and iPhone, etc."

For in-flight Internet, SIA's LCC requests a solution that can accommodate the basic web browsing and corporate e-mail access via a Virtual Private Network, as well as voice over IP (such as Skype), video-conferencing and live broadcast of time-sensitive television and radio programme, such as news, sports and special events. These latter requirements require large amounts of bandwidth, which SIA's LCC may find is commerciall unviable due to the high cost of satellite communication, although connectivity provider Row 44 believes it can offer viable live broadcast options. Uninhibited in-flight connectivity coverage is less guaranteed in Asia than the developed in-flight connectivity markets of North America and Europe. Indonesia, for example, requires further legislative changes for uninhibited connectivity on aircraft, a hindrance for aircraft passing through Indonesia airspace en route to Australia.

The tender requests suppliers to state performance affects, notably "drag introduced by the new antenna installation" for connectivity. The connectivity solution may be used to replace the ACARS datalink that is supplied over ocean by costly Inmarsat satellite coverage.
Conclusion: SIA's long-haul low-cost model starting to take shape

SIA seems to be taking all the necessary steps to differentiate its new long-haul low-cost carrier from its existing legacy mainline operation and SilkAir regional subsidiary. SIA will be innovative with its in-flight product, just as it is often the pioneer in the premium end of this sector. But instead of matching SIA in providing leading IFE products as one of many frills, at the new carrier the IFE product will be the key to unlocking critical ancillary revenues and keeping its cost base low.

Charging for all frills – including baggage, food and IFE – is an important component of the long-haul low-cost model. A denser configuration in economy class, through reduced seat pitch and/or narrower seats, is also necessary as almost all other costs are fixed.

For example, it will be difficult for the new carrier to achieve significantly lower labour costs than SIA given the general shortage of pilots in the region although some productivity improvements can be expected. The opportunity to save on airport costs will also be limited because Singapore only has one airport and Changi’s budget terminal, which is already approaching capacity due to the rapid expansion at Tiger Airways, is not at least for now an option for New Aviation’s B777s.

Fuel costs of course are also equal for all types of carriers although having a very dense configuration helps reduce the per seat fuel cost. New Aviation also will likely be able to generate higher load factors than SIA, which has reported relatively low load factors in recent months. In fact the load factor gap between LCCs and full service carriers operating in the region has been widening, indicating the stronger growth in demand at the low end of the market. It is this growth that prompted SIA Group’s move into the long-haul low-cost sector.

There are still a lot of unknowns with the new carrier. For example New Aviation hasn’t yet said if network connectivity with SIA will be pursued although indications seem to point to a strict point-to-point model at least initially. As the long-haul low-cost model is still relatively new and continues to evolve, there will likely be strategic adjustments even after the new carrier launches next year, as AirAsia X and Jetstar have done. But the commitment is there from SIA Group to boldly enter this exciting end of the market.

The initial fleet plan may be modest given the large widebody orders that have been placed by AirAsia X and Jetstar (AirAsia X for example currently has 11 widebodies with 30 more on order) but the growth in early years is large compared to AirAsia X and Jetstar, and SIA has always been a conservative company. It also has a large B777-200 fleet at its disposal to transfer to the LCC without ordering new aircraft, although those will bring costs down. If the new carrier gets off to a good start, the expansion will likely be accelerated and competition with the Jetstar and AirAsia groups will intensify. The impact on the broader Asian market will be huge and other major airline groups in the region may feel compelled to launch their own long-haul low-cost subsidiaries.